Trillion-dollar question looms as Aramco audits oil reserves

When [IPO-ARMO.SE] reveals a Western audit of its oil reserves, investors will be looking for two answers: How much oil and how much detail?

Saudi Energy Minister Khalid al-Falih has hinted at a surprise on the upside on reserve volumes ahead of Aramco’s 2018 share listing, but industry sources say detail on individual deposits – which investors have long sought – will be thin.

Saudi Arabia’s reserves of easily recoverable oil have long been the world’s largest.

But there also have long been questions about the volume and quality of those reserves. For nearly 30 years – despite rising production, wild swings in oil prices and improved technology – Riyadh has annually reported the same number for reserves of 261 billion barrels, according to BP’s statistical review.

Firms listing in New York are required to have a U.S. Securities and Exchange Commission audit. Last year, the SEC launched a probe into why the world’s largest listed oil company, ExxonMobil (XOM.N), reported virtually unchanged reserves for years despite a plunge in prices.

Exxon revised its reserves down last month.

Having an internationally recognized reserves audit has become a key task for Aramco as it seeks to become the world’s most valuable company when it lists shares in an initial public offering (IPO) for 5 percent of the firm’s value.

An industry source told Reuters that Aramco aimed to have one of its two reserves auditors wrap up the review this year, long before the share listing.

Dallas-based DeGolyer and MacNaughton, and Gaffney, Cline and Associates, part of Baker Hughes (BHI.N), are involved in the auditing, sources have said.

When the reserves are confirmed by the auditors, the results are likely to be similar to the levels of disclosure by international peers such as BP BP.L. and Royal Dutch/Shell (RDSa.L), sources familiar with the process said.

“What Aramco will do in the IPO is try to report in a similar way to other companies,” a senior source with knowledge of the plans said.

Over a decade ago, Shell’s stock price collapsed after the company said it had overstated its reserves by 20 percent. No listed oil major has seen its stated deposits stay unchanged for the past 30 years.

Aramco declined to comment. “Saudi Aramco does not comment on rumor or speculation,” a company spokesman said. Gaffney, Cline and Associates also declined to comment, while DeGolyer did not respond to a request for comment.

A reserves total that is significantly above or below the 261 billion figure is likely to affect Aramco’s potential value. Earlier phases of the audit have supported Aramco’s statements on the total size of deposits.

Aramco is showing all its data to the auditors, the sources said, and is using two firms rather than one in an effort to bolster confidence that the process is not a rubber-stamping of Aramco figures.

“Our reserves have been partially audited and are bigger than we actually booked,” Falih said this week.

“On every metric, Aramco will surprise analysts on the upside – lowest cost, highest cash flow, solid reserves that will be certified by third-party agencies.”

WHAT’S IN THE GROUND?

Historically Aramco has provided little detail publicly on its reserves other than total volume.

Publicly traded oil companies such as BP and Shell with assets distributed globally give more detail than just a headline figure, including reserves by geographic location and whether they are developed or undeveloped.

However, they do not give reserves by individual field – and for Aramco that is precisely what investors want, because its oil is concentrated in one country, Saudi Arabia.

Sadad al-Husseini, a former Aramco senior executive and now energy consultant, said Aramco has extensive details on its reserves in every field but it was not common practice for national oil companies to identify their deposits on that basis.

“What it might do initially is give a corporate summary and break it down by crude grade with more data to follow,” he said.

Aramco’s precise level of disclosure has yet to be decided, the source familiar with the plans said. He noted that Western majors do not list reserves by field.

“There is no way Aramco will be giving field-by-field detailed reserves,” another industry source familiar with the plans said, adding that the firm considers reserves decline rates and field maturity as sensitive, non-public data.

The question of how much oil is left at the biggest Saudi field, Ghawar, has long intrigued market watchers.

“What they need to offer is a package of assets with value-chain, operating and financial detail comparable to that made available by integrated oil companies,” said Jason Kenney, head of European oil and gas research at Santander.

“I doubt you’re going to get a full breakdown of the 261 billion barrels – but maybe the IPO is not about a full upstream offering either. To attract the investors, you’ve got to offer the same level of transparency as alternative investments.”